New leadership and a refocus on its core strengths should help Nike during this transition period.
Nike (NKE 0.06%) ticks the boxes of being a blue-chip stock. The company has long been an industry leader, is financially stable, and has a global brand that many companies could only dream of matching. Unfortunately, being a blue-chip stock doesn’t mean it’s immune to downturns, and that’s exactly what Nike has experienced over the past few years.
Nike stock is currently down nearly 55% since hitting an all-time high in November 2021. It fell 24% in 2024 alone. Needless to say, things are tough for Nike and its shareholders these days.
On the other hand, no investor wants their value to drop by more than half (or at all). On the other hand, Nike’s current trading levels make it a good buying opportunity for long-term investors willing to have some patience.
Changing of the guard could breathe new life into Nike
Nike recently announced that its next CEO, Elliott Hill, will replace CEO John Donahoe on October 14th.
Mr. Donahoe has been CEO of Nike since January 2020, but there have been two stories. While Nike stock (like many other hot stocks) rose during the first half of his tenure due to the coronavirus pandemic, the second half of his tenure as CEO has gone downhill.
Some say one of Donahoe’s biggest weaknesses is his lack of experience in the creative and design-oriented areas of the apparel industry. Mr. Donahoe, who previously served as CEO of eBay, said his strength was in e-commerce, and the company’s decision to focus on a direct-to-consumer strategy turned out to be one of the main reasons for its recent struggles.
Incoming CEO Hill has decades of experience at Nike. Having someone familiar with Nike’s culture and what it took to become the powerhouse it is today could help the company return to the path of innovation that has propelled the brand for years.
Fair prices from excellent companies
At the time of writing, Nike’s price-to-earnings ratio (PER) was just over 23.1 times, a far cry from the 84 times it was in late 2021. That alone doesn’t mean the stock is cheap, but it does look quite expensive by comparison. Many of our direct competitors include Adidas, On Holding (owner of On shoes), Deckers Outdoor (owner of Ugg and Hoka), and Lululemon.
Data by YCharts.
To be fair, other companies have been growing their revenue and profits at a much higher pace than Nike lately. But few can match Nike’s brand power, and it’s a competitive advantage that’s hard to price.
In this situation, consider the words of Warren Buffett. “It’s much better to buy a great company at a fair price than a fair company at a great price.” This is not an insult to other companies. Nike is the undisputed leader in sports footwear and apparel.
Nike’s recent failures should be just a blip in its long history of success.
Nike spends billions of dollars on stock buybacks
Management has taken advantage of the drop in stock prices by increasing share buybacks, with the most recent quarter including nearly $1.2 billion in buybacks.
Month Number of shares repurchased Average price paid per share Total expenses June $3.26 million $9,411 $307 million July $6.16 million $7,419 $457 million August $5.39 million $7,976 403,000 million dollars
Data source: Nike. Total expenditures are rounded to the nearest billion.
The biggest benefit for investors is a reduction in the number of outstanding shares and an increase in earnings per share. That and dividends are two important ways to return capital to shareholders beyond stock price appreciation.
Increased stock buyback activity could also signal management’s belief that stocks are a good buy on the road to recovery, especially given the steepness of the decline this year.
Nike’s recovery won’t happen overnight, but if you’re an investor with a long-term mindset, now is the time to rake in the stock as the company begins its transition.
Stephon Walters has no position in any stocks mentioned. The Motley Fool has a position in and recommends Lululemon Athletica and Nike. The Motley Fool recommends On Holding. The Motley Fool has a disclosure policy.
